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Will Singapore Go Into Recession? Analysing Risks and Resilience

Goh Jun Cheng

With dimming growth projections, analysts are asking if Singapore’s economy is headed towards recession. As a small, open economy heavily dependent on exports and multinationals, Singapore is vulnerable to global downturns. Its recent growth momentum has slowed amid trade tensions, market uncertainties and rising costs of living.

However, prudent fiscal policies have built up buffers that lend Singapore resilience. This article evaluates leading indicators, risks and mitigating measures to assess if Singapore can skirt recession or if an economic slump is inevitable.

Defining and Identifying Recessions

A recession refers to a significant, prolonged decline in economic activity rather than a one-off shock-induced contraction. In Singapore, two consecutive quarters of negative quarter-on-quarter GDP growth signify a technical recession.

Additional indicators like unemployment, manufacturing output and service sector performance gauge real economic health. Singapore last suffered a recession during the 2008 global financial crisis when GDP shrank over 2%.

With looming trade wars and market jitters, could Singapore face recession risks again?

Decelerating Growth and Investment

Ominous signs of a potential recession have emerged. In 2019, Singapore posted its weakest growth of 1.2% since 2009, dragged down by manufacturing contractions. Growth dipped further to 1.5% in the first half of 2022. This growth deceleration partly owes to a high 2021 base, but remains concerning.

Non-oil exports and factory output have contracted. Company investments and profits are declining with business confidence shaken. Construction and service sectors are slowing.

While not yet negative, these trends signal ebbing momentum that leaves Singapore’s economy more vulnerable.

Escalating Inflation and Costs

Soaring inflation presents another risk as prices erode consumer purchasing power. Singapore’s inflation hit a 14-year high of 7.5% in November 2022. Food, electricity, housing and transport costs have risen markedly.

Though inflation is supply-driven, higher prices and related interest rate hikes to dampen demand will squeeze wallets. With currencies weakening, Singapore’s imports have become costlier.

As an international business hub, it cannot escape global price hikes. Unless inflation is tamed, higher costs may cripple Singapore’s economy and competitiveness.

External Headwinds from Trade and Tech Cycles

External cyclical headwinds are also jeopardising Singapore’s outlook. The trade-reliant nation faces slowing demand as major markets like the US and China weaken. With over 177% of GDP from trade, muted trade flows hit Singapore’s manufacturing and logistics sectors hard.

Meanwhile, the global tech downturn has rattled its sizeable electronics exports including semiconductors. As major companies retrench and cut spending, Singapore’s dominant services sector will suffer. Even traditionally resilient areas like construction and tourism face uncertainties from rising interest rates and inflation.

Managing Dependence on Foreign Investment

Another structural vulnerability is Singapore’s heavy reliance on foreign investment by multinational corporations (MNCs). This overseas cash inflow represented 71.8% of its gross fixed capital formation in 2021, undergirding jobs and technology access.

But averse market sentiment has dampened investment appetite. MNCs may also shift operations from Singapore to cheaper locations. While homegrown enterprise is growing, reducing dependence on fickle foreign capital inflows can boost resilience against external cyclical shocks.

Simultaneous Monetary Tightening

To tackle inflation, major central banks have embarked on aggressive, synchronised monetary tightening. But their unprecedented pace of interest rate hikes risks overshooting into recession. Rising borrowing costs slow investment and housing markets.

As an open economy, Singapore cannot escape spillovers of dampened global demand. The strong Singapore dollar also hurts its exports competitiveness. While judicious monetary policies are needed to cool inflation, overly drastic tightening could derail growth. calibrating measures will be key to avoid recession.

Fiscal Prudence Providing Resilience

Fortunately, Singapore’s fiscal prudence provides buffers against cyclical volatility. Its coffers have been strengthened by budget surpluses in recent years. Public debt and liabilities remain low at approximately 128% of GDP in 2022.

Its substantial financial reserves allow intervention to support the economy during downturns. Past resilience packages like Jobs Support Schemes and infrastructure spending revived growth after shocks like the 2009 recession. However, stimulus cannot be sustained indefinitely, hence must be well-timed.

Trade Policy Adjustments to Secure New Markets

To counter trade uncertainties, Singapore has aggressively pivoted its trade policy. It swiftly clinched free trade agreements with the EU, UK, Pacific Alliance and Mercosur in recent years to secure alternative export markets.

To enhance regional integration, Singapore also spearheaded the CPTPP and RCEP mega trade pacts. These agreements buffer its global trade links. But further trade policy innovation is needed to unlock new engines of growth. Supply chain resilience initiatives like stockpiling and near-shoring can also enhance economic security.

Accelerating Sectoral Transformation

Economic transformation towards more productivity-led sectors is additionally critical to lift competitiveness. Despite progress, traditional industries still account for over 70% of Singapore’s manufacturing.

But sunrise industries like biomedical sciences, agri-food tech, advanced manufacturing, data services and the digital economy present growth opportunities. The 23 Industry Transformation Maps provide blueprints for sector-level restructuring.

But mindset shifts are also crucial to dismantle Change. Strong tripartite partnerships between government, industry and unions can enable smooth economic restructuring.

Adapting Foreign Worker Policies

Singapore’s tight foreign labour policies aim to spur productivity, but are blamed for dampening growth during downturns. Its dependency ratio ceiling limits firms’ share of foreign workers. Levy costs also rose.

However, business groups argue this wage-push inflation has eroded Singapore’s attractiveness. In downturns, restricting foreign labour could undercut competitiveness when labor flexibility matters more.

But easing restrictions also risks encouraging over-reliance on cheap foreign labor. Nuanced recalibration of foreign worker policies is required to balance growth and productivity aims.

Boosting Social Safety Nets

Expanding social safety nets is crucial too in case recession leads to job losses. Singapore previously lacked unemployment insurance, but introduced the Income Support Scheme in 2020 to provide temporary income relief. Its Workfare Income Supplement also combats under-employment.

Medifund protects against unaffordable healthcare costs. Public rental housing and grants assist with housing costs. Continuing to strengthen such schemes promotes inclusive growth and social risk management.

But balancing social spending with cost competitiveness remains challenging.

Conclusion: Steering Clear of Recession Requires All-rounded Resilience

Singapore’s risk of recession has heightened amid slowing growth, global volatility and monetary tightening. Key pillars like trade, investment and MNCs are under strain.

But prudent fiscal management provides policy buffers. Expanding trade links, transforming industries, enhancing social security and skillfully navigating labour policies can build resilience.

With responsive governance and the cooperative spirit of business, unions and citizens, Singapore can weather cyclical storms while progressing with productivity-driven upgrading.

By balancing short-term mitigation and long-term transformation, Singapore could yet chart a course around looming recession risks towards sustained, inclusive growth.

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